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Idiosyncratic Volatility and the Cross-Section of Expected Returns

29 Pages Posted: 3 Mar 2006  

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Nusret Cakici

Fordham University

Multiple version iconThere are 2 versions of this paper

Date Written: December 2005

Abstract

This paper examines the cross-sectional relation between idiosyncratic volatility and expected stock returns. The results indicate that (i) data frequency used to estimate idiosyncratic volatility, (ii) weighting scheme used to compute average portfolio returns, (iii) breakpoints utilized to sort stocks into quintile portfolios, and (iv) using a screen for size, price and liquidity play a critical role in determining the existence and significance of a relation between idiosyncratic risk and the cross-section of expected returns. Portfolio-level analyses based on two different measures of idiosyncratic volatility (estimated using daily and monthly data), three weighting schemes (value-weighted, equal-weighted, inverse-volatility-weighted), three breakpoints (CRSP, NYSE, equal-market-share), and two different samples (NYSE/AMEX/NASDAQ and NYSE) indicate that there is no robust, significant relation between idiosyncratic volatility and expected returns.

Keywords: idiosyncratic risk, total risk, expected stock returns, size, liquidity

JEL Classification: G10, G11, C13

Suggested Citation

Bali, Turan G. and Cakici, Nusret, Idiosyncratic Volatility and the Cross-Section of Expected Returns (December 2005). Available at SSRN: https://ssrn.com/abstract=886717 or http://dx.doi.org/10.2139/ssrn.886717

Turan Bali

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://msbonline.georgetown.edu/faculty-research/msf-faculty/turan-bali

Nusret Cakici (Contact Author)

Fordham University ( email )

Fordham University
Graduate School of Business
New York, NY 10023
United States
2126366776 (Phone)

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